HC 

B7 


UC-NRLF. 


SB    E37 


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A  MISSING  LINK  IN 
INTERNATIONAL  FINANCE? 


AN  ADDRESS  BY 


EUGENE  MEYER,  JR. 

Managing  Director  of  the  War  Finance  Corporation, 
Washington,  D.  C. 

TO  A 

•UP  OF  INVESTMENT  BANKERS  AT  THE 
BANKERS  CLUB,   NEW  YORK,  APRIL  25,  1921 


A  MISSING  LINK  IN 
INTERNATIONAL  FINANCE? 

AN  ADDRESS  BY 

EUGENE[MEYER,  JR. 

Managing  Director  of  the  War  Finance  Corporation, 
Washington,  D.  C. 

TO  A 

GROUP  OF  INVESTMENT  BANKERS  AT  THE 
BANKERS  CLUB,  NEW  YORK,  APRIL  25,  1921 


Our  foreign  trade  and  international  finance 
probably  have  been  discussed  as  much  and  as 
thoroughly  all  over  this  country,  in  our  papers 
and  magazines  and  in  public  and  private  meetings 
within  the  past  year,  as'  any  economic  question 
that  has  ever  engaged  the  attention  of  our  people 
in  a  National  way.  It  is  no  longer  necessary  to 
explain  that  we  are  now  a  creditor  Nation.  That, 
I  think,  is  generally  understood.  At  any  rate,  an 
understanding  of  the  fundamental  facts  in  con- 
nection with  our  international  financial  relations 
may  be  taken  for  granted  in  this  assemblage. 

What  we  are  really  interested  in  now  is  whether 
anything  that  is  not  being  done  can  be  done,  on  a 
sound  business  basis,  to  improve  international 
financial  conditions.  Our  trade  is  suffering,  and 
many  of  our  people  are  in  distress  to  such  an 
extent  as  to  make  it  a  very  serious  matter  —  a 
matter  with  which  every  good  citizen  in  the  bank- 
ing business,  and  certainly  everyone  who  has  any 
responsibility  as  a  public  official,  must  .concern 
himself. 

In  the  pre-war  period,  when  the  banking  for 
American  import  and  export  business  was  done 
very  largely  by  foreign  banking  institutions  and 
with  foreign  capital,  European  bankers  and  mer- 
chants furnished  to  us,  as  a  debtor  nation,  some 
facilities  which,  it  appears  to  me,  we  do  not 


M 


offer  them  now.  As  pre-war  conditions  are 
reversed,  it  might  be  expected  that  facilities 
similar  to  those  we  had  at  our  disposal  would, 
under  present  conditions,  be  placed  by  us  at  the 
disposal  of  at  least  some  of  the  foreign  countries. 
I  refer  especially  to  an  international  security 
market.  To-day  such  a  market  does  not  exist. 

I  do  not  mean  that  our  bankers  have  not  done 
well.  On  the  contrary,  the  firms  that  have 
handled  the  floating  of  Dollar  loans  for  foreign 
governments  and  municipalities  have  achieved 
noteworthy  results  in  that  field.  The  maturity 
of  the  Anglo-French  loan  last  year,  which  had 
been  looked  forward  to  with  some  apprehension, 
was  met  and  handled  in  a  most  effective  way. 
Other  large  refunding  operations  and  new  loans 
have  been  handled  with  signal  success  from  time 
to  time.  But  we  have  done  nothing  as  yet  to 
establish  an  international  security  market  in  this 
country;  the  obligations  placed  here  officially  by 
our  bankers,  with  listing  in  our  public  markets 
and  with  the  protection  demanded  by  the  Ameri- 
can investor,  have  only  an  American  market. 

There  has  been  considerable  dealing  over  the 
counter,  through  banking  houses,  in  the  inter- 
nal securities  of  foreign  governments,  munici- 
palities, and  business  corporations.  But  we  still 
lack  a  fluid  international  security  market. 

If  we  hark  back  to  the  period  before  1914,  we 
will  recall  that  many  of  our  own  securities  had 
an  international  market  in  London,  and  perhaps 


in  France  and  Germany  and  Holland,  and  some- 
times in  Belgium,  as  well  as-,m  New  York  and 
other  American  cities.  The  part  played  by  the 
international  security  market  at  that  time  in  the 
adjustment  of  trade  relations  is  being  overlooked. 
I  desire  to  put  this  question  to  you  gentlemen: 
Is  the  matter  not  worth  more  consideration  than 
we  have  been  giving  to  it? 

The  Edge  Law  Banks  are  expected  to  place 
American  investment  capital  at  the  disposal  of  the 
foreigner  for  short  or  long  periods.  They  will 
occupy  here  the  position  which  the  English  and 
Scottish  Trusts  rilled  in  Great  Britain  before  the 
war.  They  will  issue  their  general  debentures, 
secured  by  foreign  loans  or  investments  and  by 
capital  from  the  sale  of  stock.  There  is  nothing 
new  about  an  Edge  Law  Corporation  as  pro- 
posed ;  it  is  substantially  the  English  and  Scottish 
Trust  idea  adapted  to  our  purposes. 

So  far,  nothing  has  been  done  to  interest  our 
investors  in  the  obligations  or  debentures  of 
Edge  Law  Corporations.  We  all  hope  that  one 
or  more  of  these  institutions  will  succeed  in 
raising  adequate  capital,  and  that  a  very  useful 
need  may  thus  be  met.  There  will  still  remain, 
however,  many  investors  who  prefer  a  particular 
security  rather  than  a  debenture  covered  by  col- 
lateral securities,  even  of  the  very  best  quality. 
That  is  a  matter  of  taste  on  the  part  of  investors, 
and  both  tastes  should  be  gratified  on  a  sound 
business  basis. 


If  you  will  recall  the  critical  periods  in  our 
pre-war  experience,  you  will  remember  the  days 
when,  perhaps,  every  man  in  this  room  who  was 
interested  in  the  financial  markets  would  want  to 
know  what  London  and  the  Continent  were  doing 
in  our  security  markets;  the  financial  press  em- 
phasized in  every  critical  time,  when  America 
was  looking  to  Europe  for  capital,  the  importance 
of  English  and  Continental  operations  in  our 
security  markets. 

In  the  adjustment  of  the  international  relations 
of  a  financial  character  which  marked  the  trans- 
actions in  goods  and  services,  securities  played 
a  very  much  more  important  role  than  gold. 
We  used  to  hear  about  gold  shipments,  exports 
and  imports;  but  everybody  interested  in 
the  international  markets  knows  that,  when  inter- 
est and  exchange  rates  caused  securities  to  flow 
from  America  to  Europe,  or  vice  versa,  the 
movement  achieved  a  volume  and  importance  far 
beyond  the  totals  of  our  gold  exports  and  im- 
ports. At  every  important  moment  in  our  history, 
securities  constantly  were  flowing  back  and  forth 
in  response  to  import  and  export  conditions  in 
commodities,  and  relating  themselves  to  the  in- 
terest and  exchange  conditions  on  both  sides  of 
the  Atlantic. 

If  we  have  any  idea  that,  in  the  future,  we  are 

going  to  play  a  larger  role  as  a  financial  center  in 

this  world  situation  than  we  have  in  the  past,  we 

must    determine    to    establish    an    international 

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security  market  in  this  country.  And  let  us  re- 
member that  merely  the  dollar  obligations  of  the 
foreign  borrowers,  no  matter/  what  the  quantity 
may  be,  will  not  make  an  American  international 
security  market. 

We  were  not  asked  before  the  war  to  issue 
Sterling,  Franc,  Guilder  or  Mark  securities  for 
all  the  capital  we  needed;  for  much  the  greater 
part,  the  foreigners  took  our  dollar  obligations. 
On  the  continent,  in  some  cases,  they  issued  local 
certificates  representing  our  obligations  which 
were  printed  in  their  own  languages.  These 
certificates  simply  represented  trusteed  American 
shares  or  bonds. 

While  no  one  here  is  thinking  of  any  trouble 
for  this  country  in  the  future  from  a  military 
point  of  view,  or  a  commercial  point  of  view,  or 
even  a  financial  point  of  view,  we  do  know  that 
times  change.  When  the  French  floated  a 
$50,000,000  Pennsylvania  Issue  in  Francs,  and 
when  other  issues  were  floated  on  the  continent 
and  in  Great  Britain,  I  doubt  very  much  whether 
they  anticipated  that  the  day  would  come  when 
their  military  safety  would  depend,  in  no  small 
way,  on  those  assets. 

It  may  be  that  at  some  future  time  the  United 
States  will  find  it  of  great  value  to  possess  assets 
having  a  world  market.  We  ought  to  have  here 
securities  which  are  readily  marketable  in  other 
countries.  Practically  all  our  American  securities 
have  been  brought  home,  and  the  markets  for 
7 


them  abroad  no  longer  exist.  Of  course,  markets 
might  be  developed  again  in  case  of  need,  but  this 
would  take  time.  If  we  are  to-day  in  a  position 
to  furinsh  funds  for  foreign  trade  and  invest- 
ment, and  if  we  believe  at  all  in  Europe,  it  would 
seem  that  we  must  consider  whether  or  not  we  are 
willing  to  take  something  other  than  Dollar  se- 
curities and  recommend  to  the  investors  of  this 
country  such  of  them  as  deserve  confidence. 

There  is  another  question  I  should  like  to  raise. 
When  many  of  our  banking  houses  are  facili- 
tating the  purchase  of  foreign  securities  in  for- 
eign currency  terms,  as  they  are  doing  on  a  con- 
siderable scale,  is  it  not  worth  doing  in  the  very 
best  way?  The  Stock  Exchange,  I  understand, 
through  its  Listing  Committee,  is  anxious  to 
furnish  its  facilities  in  connection  with  sound 
business  that  seems  to  be  in  the  public  interest. 
So  far  as  I  know,  however,  there  is  not  listed  on 
the  Stock  Exchange  a  single  foreign  security, 
outside  of  Dollar  issues,  for  which  a  broad  mar- 
ket has  been  developed  since  the  war. 

Bankers  recommend  foreign  investments  from 
the  combined  viewpoints  of  investment  and  specu- 
lation which  the  exchange  rate  brings  into  the 
situation.  Is  it  not  true  that  a  speculative  in- 
vestor, above  all  things,  wants  a  market,  an  active 
market,  and  a  public  market?  If  the  resources  of 
the  speculative  investor  are  to  be  availed  of  for 
the  general  situation  and  in  the  general  interest, 
and  if  bankers  consider  that  these  funds  are 
8 


worth  obtaining,  is  it  not  appropriate  that  the 
facilities  of  our  great  public  markets  should  be 
used  as  their  officials  would  ISef  glad  to  have  them 
used  ? 

Why  should  there  not  be  public  markets  for 
American  certificates  representing  foreign  secu- 
rities in  a  form  that  would  meet  the  requirements 
of  the  Stock  Exchanges  as  to  engraving  and 
registration?  Why  do  we  not  work  out  some 
method  of  making  the  resources  of  the  speculative 
investor  more  available  in  this  emergency? 

If  we  had  had  an  active  market  in  this  country 
for,  let  us  say,  for  example,  the  English  Victory 
bonds,  which  in  the  hands  of  American  holders 
would  be  exempt  from  English  taxes  and  which 
have  a  broad  market  in  England,  I  do  not  believe 
that  Sterling  would  have  fluctuated  as  violently 
as  it  did  during  the  year  1920.  From  a  price  of 
$3.78  per  pound  in  January,  1920,  it  declined  to 
$3.22  in  February,  rose  to  $4.01  in  April,  de- 
clined again  in  November  to  $3.34,  and  recovered 
in  January,  -1921  to  $3.88.  When  Sterling  de- 
clines 50  or  60  points,  and  then  rises  again 
abruptly,  you  may  think  it  does  not  matter  after 
the  price  is  restored.  But,  in  the  meantime,  there 
results  a  very  harmful  interference  with  our  trade 
and  with  the  marketing  of  American  products. 

I    am    not   speaking   of    English   Government 

Bonds,  or  of  any  other  issue,  in  particular,  I  am 

not  speaking  of  French  Government  Bonds,  of 

French  industrial  securities.    I  am  merely  raising 

9 


the  question  here,  as  I  raised  it  in  a  private  dis- 
cussion which  led  to  the  suggestion  that  I  present 
it  at  this  luncheon :  Are  we  doing  all  that,  in  the 
general  interest,  can  be  done  in  this  matter  of 
making  here,  on  a  proper  basis,  an  international 
market  for  foreign  securities  of  sound  character  ? 
If  taxation  in  foreign  countries  interferes,  would 
it  not  be  worth  while  for  the  bankers  or  the  bank- 
ing organizations  of  this  country  to  take  up  the 
question  with  bankers  on  the  other  side,  to  see 
whether  or  not  tax  laws  can  not  be  changed  in 
our  mutual  trade  interest?  I  do  not  believe  this 
would  be  difficult,  if  there  were  any  evidence  of  a 
serious  attempt  to  make  a  market  here  which 
would  be  valuable  from  the  points  of  view  of  the 
peoples  on  both  sides  of  the  w'ater. 

During  the  war,  the  United  States  Govern- 
ment in  connection  with  the  Fourth  Liberty  Loan 
Act,  the  terms  of  which  were  arranged  before 
we  expected  the  Armistice  so  soon,  and  at  a  time 
when  the  dollar  was  at  a  discount  in  Spain,  Nor- 
way, Sweden,  and  Denmark,  exempted  from 
American  taxation  United  States  Government 
Bonds  in  the  hands  of  foreigners.  That  was  done 
to  encourage  the  buying  of  our  Bonds  by  certain 
countries,  because  it  was  realized  that  their  pur- 
chase by  foreign  countries  would  help  to  stabilize 
exchange  where  the  dollar  was  at  a  discount. 
It  was  something  we  were  willing  to  do  at  that 
time,  when  we  needed  exchange  in  our  relations 
with  certain  countries,  although  we  were  furnish- 
10 


ing  funds  to  the  countries  associated  with  us  in 
the  war. 

We  all  feel  that  American  tankers  are  able  to 
meet  every  situation  and  discharge  every  obliga- 
tion that  is  theirs.  We  realize  that  they  have 
been  working  under  difficult  conditions  during 
the  past  two  years  and  we  know  that  the  stress 
of  the  last  year  has  been  unusual  in  every  depart- 
ment of  banking — financial  and  commercial 
There  is  no  desire  to  place  undue  burdens  upon 
the  American  banker;  but  his  ability  to  carry 
burdens  is  great,  and  he  must  expect  to  have  the 
people  of  the  country  look  to  him  for  leadership, 
as  in  fact  they  do. 

The  country  looks  to  Eastern  bankers  to  lead 
in  international  finance.  Country  bankers  do  not 
pretend  to  understand  it.  They  have  troubles, 
particularly  in  the  South  and  West,  which  are 
greater  than  many  of  us  imagine,  because  of  the 
congestion  of  commodities  and  of  bank  loans  as 
well.  In  some  sections,  the  condition  is  truly 
pathetic. 

A  banker  from  Mississippi  recently  came  to 
the  War  Finance  Corporation  for  assistance  in 
moving  six  thousand  bales  of  low-grade  cotton. 
He  told  us  they  had  been  compelled  to  close  the 
schools  in  his  town  because  there  was  not  enough 
money  in  the  community  to  keep  them  going. 
I  shall  not  say  that  it  is  so  bad  in  many  places, 
but,  in  general,  it  is  a  time  of  real  distress.  Any- 
thing that  bankers  can  do  to  improve  inter- 
n 


national  conditions  is  worth  doing  in  the  interest 
of  the  whole  country,  not  to  mention  other  coun- 
tries. 

While  we  are  thinking  about  present  condi- 
tions, and  how  we  can  finance  the  movement  of 
our  surpluses,  it  is  worth  while  to  remember  that 
conditions  change  rapidly.  A  year  ago  we  were 
exporting  gold  to  the  Argentine,  and  the  dollar 
was  at  a  discount  there.  During  recent  months, 
the  American  dollar  has  been  at  a  premium  of 
from  15  to  20  per  cent,  in  the  Argentine.  As 
I  have  already  mentioned,  the  dollar  was  at  a 
discount  of  40  per  cent,  in  Spain  two  years  ago; 
to-day,  it  commands  a  premium  of  about  40  per 
cent.  It  is  the  business  of  the  bankers  to  en- 
deavor to  stabilize  business,  where  conditions 
justify  it,  and  it  is  justified  if  we  need  to  export 
more  goods  than  can  be  paid  for  by  ordinary 
methods,  and  if  good  securities  can  be  obtained  in 
exchange  for  our  commodities. 

We  hear  a  great  deal  about  credit.  Bankers 
have  given  commercial  credits  very  freely,  and 
some  of  the  commercial  companies  perhaps  have 
gone  beyond  the  limit  of  prudence  in  extending 
credits.  Long-term  banking  credit  is  popular  in 
current  discussion  now,  but  it  cannot  be  regarded 
as  sound  under  normal  conditions.  The  long- 
term  funds  must  come  from  the  investor;  the 
short-term  money  ought  to  come  from  the  banks 
and  bankers;  and  the  sooner  we  can  get  invest- 
12 


ment  money  into  this  situation  on  a  sound  basis, 
the  better. 

The  Edge  Banking  Act  sets  up  one  of  the 
forms  of  agencies  designed  to  secure  investment 
money  for  foreign  enterprises.  The  War  Finance 
Corporation  is  merely  a  temporary  agency  in- 
tended to  help,  in  an  emergency,  if  bankers 
choose  to  avail  themselves  of  the  facilities  it 
offers.  If  we  expect  to  export  largely  in  excess 
of  our  imports,  or  even  if  we  do  not  intend  to 
do  so ;  if  we  are  to  collect  interest  on  investments 
which  this  country  may  have  abroad;  and,  cer- 
tainly, if  we  propose  to  furnish  capital  to  foreign 
countries,  a  way  must  be  found  sooner  or  later 
to  get  some  of  our  investment  funds  into  sound 
foreign  investments.  Would  it  not  seem  logical, 
I  ask  you,  to  give  active  consideration  to  the 
question  of  enlisting  some  of  the  resources  of  the 
American  investor  in  sound  foreign  securities  as 
well  as  in  dollar  securities?  Would  it  not  be 
good  business  ?  Should  it  not  be  done  in  the  best 
way  ?  Is  it  not  of  great  importance  in  the  public 
interest  ? 


